Economics of population growth

Welcome to Finance and Fury. Economics of population and their output.

In today’s episode, we will be looking at how population growth affects economic output – along with what is the optimal solution to population growth and economic output depending on the environment that you live in – and if overpopulation is a real thing and something to be concerned about – lots to cover

Population growth – pretty simple definition – it is the increase in the number of people in a population

1. The estimated global human population growth amounts to around 83 million annually, or 1.1% per year
   1. The global population has grown from 1 billion in 1800 to around 8bn
   2. The UN estimates the total population to reach 8.6 billion by mid-2030, 9.8 billion by mid-2050 and 11.2 billion by 2100
      1. other academics have developed human population models that account for additional downward pressures on population growth – and there are projections that the global population will peak before 2100 and then start declining – from an economic point of view, a declining population can have a dramatic impact
   3. The relation­ship between population growth and economic development is complex – but in general, an increasing population means an increase in the supply of labour
      1. Labour is a basic factor of production –throughout humanities entire economic development, has been the major source of economic growth in re­corded history
      2. Economic output – combination of differing factors – labour is one, for which population, particularly working age population is the backbone
      3. It should be noted that human labour’s output has expanded by technology, even primitive forms such as tools like a shovel or an axe – this increases our labour output – ever try to chop a tree down or dig a hole with your own bare hands?
      4. But it was technically the labour, being the population, who invented and built these technology – without a population, you have no technology growth, no capital growth, no other forms of economic factors – all starts with population – the more a population grows, generally the more all other factors can also grow over time as more wealth is created and new innovations occur
   4. A growing population leads to an increasing total output – but it can also create a problem – with an increasing number of people – it can mean that this increase in total output is now divided by a greater number of people
      1. There are more people to work, but also more mouths to feed – this can be called per capita output – which depends on the pattern of population growth and depends on the age composition of the population.
         1. if population growth has increased, and there is an increasing number of children relative to adults, then the number of consumers will be growing more rapidly than the number of producers – therefore, the dependency burden on the active workers of the society will be heavier, and the effect may be negative. But if there is a rise in life-expectancy which extends the productive years of the workers of the society, then the problem of an increased burden of dependency may be at least partially offset – but this is based on the assumption that children are a burden on the economy or households – this is only true in western/developed economies
      2. How this has changed over time – there are different incentive models between agrarian societies to developed nations – as we have to look at two different economic models
         1. In an agrarian based economy, where most communities are self-sufficient and farm based, the more children that you can have the better your potential economic output can be
            1. More children are a financial benefit, rather than being a financial benefit in the form of free labour
         2. When looking through a developed economy’s perspective, things change – most people don’t require labour around their own farm as this is not their income source, or source of food – they work in an office and instead, have to support a child for normally 18 years, at a financial loss – often covering child care or schooling fees along the way
            1. The last two centuries have seen a fall in the death rate across the board as economies and health care systems also developed – but in developed nations, the birth rate also fell.
            2. Economic development brought higher standards of living, better food, clothing, shelter and protection

• But the prevailing theory is that the improvement in standards of living, particularly medical facilities and health care, led to a fall in infant mortality and longer life-expectations – with increasing levels of population – These were all related to the economic progress these countries were mak­ing

The size of the population base is of great importance as it affects the total scale of the economy – both in positive but also negative ways depending on the makeup of the population – and from a consumption and production point of view  

5. This is where the population can be broken down into working age, non-working age
   1. Throughout populations – it is typically true that the working age group bears the burden of supporting the non-working members
      1. If a larger proportion of the population is either retired or at school, the extra cost of pensions or education falls on relatively smaller numbers who are working and earning
         1. There are some exemptions – such as retirees who pay tax and are not on a government pension – and have the capacity to consume as much as those who are working age
      2. So in theory – the ideal population growth for economic growth is a slight pyramid shape – with less of a proportion being non-working age at the upper end – whilst still maintaining positive population growth
   2. However there can be issues with this, as a growing population, within a limited geographical area, can place additional burdens on the existing factor of endowment within the economy
      1. This can include natural re­sources, infrastructure, such as water and energy capacity, along with available land
      2. This can lead to diminishing returns for output of labour – can become a problem if population growth is rapid and there is no marginal increase in natural re­sources (land) or man-made resources, such as infrastructure to meet the demand of the new population
   3. But in general – A growing population means a growing market for most goods and services
      1. With a growing population – the expanding market may stimulate entrepreneurs to invest more and more in capital goods and machinery – increasing competition and business activity
         1. With more businesses and more employment, total incomes will grow in the process – allowing for more consumption to take place
         2. it will provide an outlet for product to be produced at economies of scale – meaning cheaper goods

• The net effect is generally favourable to an economy, with more total income and cheaper goods in general – increasing quality of life

7. To break down these economic factors further
   1. Consumption – Being the capacity of the population to purchase goods and services – The pattern of spending reflects the age distribution.
      1. With An ageing population—one that contains a rising proportion of non-working people – this also requires an increasing quantity of products produced with less to produce them
   2. Production – It is generally considered that working age population are more productive than non-working
      1. Production depends on the working age group. It is obviously possible to produce more goods and services and so achieve a higher standard of living if a larger proportion of the population is in the working age group — between school-leaving and retirement ages — which must provide the bulk of the country’s labour force.
   3. Looking at these factors, you can start to determine GDP – consumption, investment, government expenditure, and net exports
      1. If you have a growing population, as long as the income of a nation is also growing, consumption will grow, investment will increase as businesses will expand their operations to meet the demand of the additional consumption, governments expenditure will grow due to additional tax bases, and exports can grow if a nation is now producing more, the inverse is true though if a population is no longer productive, all of these factors start to shrink
   4. Of course, the size of the domestic market of a country does not only depend on the numbers, but also on the per capita income level
      1. Per capita income is calculated by dividing national income by the size of the population. When population is increasing faster than national in­come or GNP the standard of living of the average citizen does not improve. In most developing countries population is growing steadily even today. This is important obstacles to development if population growth outpaces certain factors

This is where population growth isn’t all positive and can have negative effects –

1. Major three areas seen as negative consequences from rapid population growth
   1. Capital shallowing: Rapid population growth reduces per capita availability of capital and thus lowers labour productivity – more labour and less production capacity – more people than jobs that are available
   2. Age dependency: Rapid population growth produces a large number of dependent children whose consumption requirements lower the ability of the economy to save – this is only true in western developed countries – as children as young as 5 can become productive members of society in agrarian based or developing societies
   3. Investment diversion: Rapid population growth shifts government expenditures from the country’s infrastructure (roads, communications, etc.) to education and health care – whilst education and health care is important, it is an opportunity cost – which comes at the expense of future economic growth as the health care generally is disproportionally spent on non-working elderly populations, and education is spent on non-working younger populations
2. The World Bank has started the population growth above 2% per annum acts as a brake on economic development –
   1. If a growth rate is beyond this, it is called a ‘population explosion’ problem – which can be seen in many developing countries that have little to no economic growth to show from it – Yet their populations are expanding rapidly. These countries are importing western technology to start modern industrialisation programme – so time will tell if this is converted into economic growth as endowment factors also increase
   2. The spread of additional technology, additional health care, medicine, and sanitation has brought sharply falling death rate and rapid population growth – goes to slightly disprove the assumption that falling death rates lead to lowering population growth
      1. But the increase in the standard of living from the growing population growth through a declining death rate hasn’t been recorded
      2. Important to note that they do not have the same economic models – most of these nations are not modern capital markets and still under the agrarian based models

• Per capita incomes were seen to decline or not grow – but it wasn’t the economic model – measuring these countries by our own metric doesn’t tell the full story

1. More bater based/community economies

Ideal model for economic growth – no one ideal model – the relationship to growth has a lot to do with the nation’s economic makeup  

1. One of the first major published works around the relationship between population growth and economic development was in 1798 when Thomas Malthus argued that population growth would depress living standardsin the long run
   1. This simple theory stated that given the fixed quantity of land, population growth will eventually reduce the resources that each individual can consume, ultimately resulting in disease, starvation, and war – the solution? Stop having children – referred to as moral restraint – but this was the spark of the concept that the world population was growing too large
   2. This theory ignores technological advances – and additional types of resources being found as technologies advanced – where more energy, food and resources are available today per capita compared to 1798 by an order of magnitude
   3. Big plot of a marvel movie was with Thanos snapping his fingers to wipe out half of the population of the universe to save it – but in the process he destroyed it – beyond the trauma from suddenly losing half of your family and friends
   4. Think about the loss of human potential and economic output in the process – lack of technological progress, collapse of capital investments, would set back societies decades – if not hundreds of years
2. Over population does exist – going back to Malthus’ thesis – only exists in cities where there are land shortages and dense concentrations of people – lots of land availability – but not within a 15 to 30 min travel time of a city, particularly in Australia
   1. With urbanisation – overpopulation in cities can become a real issue – but increasing population by itself isn’t – as long as the factors of endowment allows for such growth – which in most countries is possible if government regulation didn’t hamper these
      1. It is only if you have less people producing as the population grows that you can end up in real trouble – if the whole population growing doesn’t produce anything, this can become a real problem to the economy
      2. If the population grows and you see less working age people producing, as measured by participation rates, that the population growth can lead to lowering economic growth

In summary – In my view – population growth is great – from an economic point of view, it brings with it an increase in the labour force – even though this is delayed until children being born reach maturity to become productive members of a workforce  

4. A large labour force means more productive manpower, while a larger overall population increases the potential size of domestic markets – increasing the measurement of GDP
   1. The biggest question is at what rate – rapidly growing manpower in labour-surplus nations can have a negative influence on economic progress if the number of jobs cannot keep up
5. Obviously, it will depend on the ability of the economic system to absorb and productively employ these added workers, an ability largely associated with the rate and type of capital accumulation and the availability of other related factors such as managerial and administrative skills
6. But in western nations – natural replacement of the population becomes an economic burden compared to agrarian based societies
7. From an economic point of view – optimal point of view is when the population growth skips the unproductive first 16 years of life – why immigration is embraced in many nations and little to no incentives are provided to incentivise natural replacement